Rupert returns

21st
Century Fox – the Murdoch family’s entertainment conglomerate – is bidding for the 61%
of satellite broadcaster Sky it does not own. Predictably, alarm bells
are ringing. What is at stake?

Campaigners dressed up as Theresa May and Rupert Murdoch protest against Murdoch's takeover bid for Sky in Parliament Square, London. December 20, 2016. Stefan Rousseau, Press Association. All rights reserved.Rupert
Murdoch launched Sky television as a UK-targeted satellite television service
in 1988. Its meagre offering included a movie channel, an entertainment channel,
the UK’s first 24-hour news channel and a rudimentary sports package. Few
expected it to survive.

Survive it
did, but only after nearly bankrupting Murdoch’s master company, News
Corporation (NewsCorp hereafter), entering a forced merger with its rival (British
Satellite Broadcasting), reducing the NewsCorp stake in the merged company to
below 40% in order to facilitate a public flotation, and seeing a swathe of
legislation introduced to prevent NewsCorp – or Sky – ever owning any
significant part of ITV.

Through
those 28 years, Murdoch has subsidized Sky News, whether as sole owner in the
early years, or part owner ever since. At least £500 million must have been
invested so far, without any real prospect of the service making a profit
(especially after the BBC launched its own 24-hour news channel). Throughout
this period, Sky News has won multiple awards, been recognized as a highly
successful editorial offering, diligently observed UK licensing requirements
for impartiality and accuracy, and pioneered a range of developments such as
the Prime Ministerial debates during elections.

When
NewsCorp sought to buy the 61% of Sky it did not own, in 2010, the independent
directors – representing the majority of shareholders – effectively invited him
to close down Sky News, to remove any regulatory obstacles to the deal (and
also allow a higher price to be paid). Murdoch declined, and after Ofcom –
thanks to a deeply misleading and perverse analysis – objected to the
transaction, he spent months trying to find a formula that dealt with Ofcom’s
stated anxieties about media plurality whilst keeping Sky News alive.

Eventually,
six months later, the revelation that Millie Dowler’s voice mails had been
listened to by the News of the World (Murdoch’s highly popular Sunday newspaper)
led to outrage in the House of Commons, the closure of the News of the World
and a hasty retreat from the Sky deal by Murdoch. Yet before then, the chief
executives of both The Telegraph and The Guardian had publicly stated that
closing Sky News might be the required price for allowing the deal: such are
the defenders of media plurality!

***************

Since then,
much has changed. The phone-hacking affair cost NewsCorp hundreds of millions
of pounds in compensation and legal fees. A range of journalists and executives
were put on trial, and a handful jailed, including the former editor of the
News of the World, Andy Coulson. Murdoch and his son James were called before
the House of Commons Select Committee on Media, where they apologised profusely
(whilst denying any personal knowledge of criminality).

James
stepped down from the chairmanship of Sky, allowing Ofcom – whilst trenchantly
criticising his failure to deal with phone-hacking at NewsCorp’s newspaper
subsidiary, where he was chief executive – nonetheless to give NewsCorp
approval as a “fit and proper” controlling shareholder in Sky. James has subsequently
resumed his chairmanship of Sky: but Ofcom has not attempted to block this, or to
re-visit its “fit and proper” assessment.

More
importantly, persistent shareholder criticism of NewsCorp’s attachment to the
declining newspaper business – long pre-dating the phone-hacking disaster –
finally induced the Murdochs to split their company in two.

NewsCorp
itself now owns all the print businesses, whilst a new company – 21st
Century Fox – embraces all the film, TV and entertainment elements: Twentieth
Television (producer of such hits as The Simpsons and Modern Family), Fox
Television Group (including the Fox Channel, Fox News and Fox Sports) and a
range of international assets including the 39% of Sky. The two companies are
both controlled by the Murdoch family, through the significant minority stakes
they hold, but each has a wide range of outside shareholders, which effectively
constrains any possible co-ordination between the companies (not that there is
any evidence of that being pursued).

Outside the Murdoch
empire, the scale of change is even greater. In the UK, BT Sport has emerged as
a formidable competitor for Sky’s premium content, and Liberty Global’s
purchase of Virgin Media has greatly strengthened cable’s challenge to Sky as a
bulk supplier of channels.

Across the
globe, the internet is now enabling consumers to download huge volumes of video
content, without any need even to own a television, let alone a satellite dish.
Netflix is spending ten times more on content every year than Sky, and has
nearly six million UK subscribers just four years after launch (Sky is barely
growing the 10 million it carefully accumulated over 28 years). In the US, the
response has been defensive mergers between the likes of telecoms giant AT and
T and the major content owner Warner (which includes HBO amongst its assets).

Murdoch –
having failed in his own bid for Warner – has decided that his best bet for
defending his position is to consolidate within Sky: it is, after all, a
business he knows inside out, and where he can both measure risk and execute
strategy rapidly. Sky itself is a much bigger company than it was in 2010,
having absorbed its equivalents in both Germany and Italy.

For the UK,
much is at stake. Thanks to Murdoch, we have become the European hub of the
satellite TV industry, and well over 100,000 jobs have been created. James
Murdoch has reportedly promised that if Fox were to take full ownership of Sky,
billions more would be invested in the UK, with tens of thousands of additional
jobs in prospect. On the other hand, if the bid fails, Fox’s plan B is to sell
the 39%: depriving Sky of its creative and business genius, and so putting at
risk the achievements of the last 28 years.

****************

Needless to
say, none of this cuts any ice with Murdoch’s traditional critics. Hacked Off
and 38 Degrees have launched petitions to oppose the deal, and politicians
across the hard and soft left have called for – at the very least – a “public
interest” intervention from the Culture Secretary, Karen Bradley, requiring
Ofcom to check on the media plurality implications of the proposed transaction.

Last time
round, there was an alliance of media firms which campaigned to block NewsCorp
– led by those improbable bedfellows, The Telegraph, The Guardian, Trinity
Mirror and the Daily Mail, and supported by both our publicly owned
broadcasters, the BBC and Channel 4. To find the Mail singing the praises of
Hacked Off in this context is pure Alice in Wonderland; on the other hand, it
is very hard to believe that Tony Hall will follow the example of his
predecessor, Mark Thompson, who was reprimanded by the BBC Trust for signing
the media alliance letter without first asking permission.

Channel 4,
already embroiled in a series of battles with the DCMS over its future status
and appointment of board members, may feel there is nothing to lose from
voicing its opposition, despite the example set by ITV, last time, whose Chief Executive
refused to sign the media alliance letter, to avoid any suggestion that ITV’s
news coverage might lack impartiality. In any event, The Guardian has already plunged
into battle, with an impassioned article by Polly Toynbee (which sadly contains
15 factual errors in just 13 paragraphs).

A problem
for opponents of the deal is to find some legal and factual basis for blocking
it, over and above a well-honed hatred of the Murdochs and their already
significant position in UK media. Ed Miliband and Sir Vince Cable have penned a
joint article for The Guardian which contained probably the biggest whopper yet
in a year of big lies.

They argue
that, as the Murdochs effectively control NewsCorp’s 30+% share of UK national
newspaper consumption, they should not be allowed to take full control of Sky
News, which they claim is responsible for 45% of all radio news consumption: a figure
45 times too large at best, and – if the legal and contractual reality of radio
news broadcasting is acknowledged – completely wrong at worst.

***************

How did they
arrive at such a giant error (assuming it wasn’t a deliberate lie)? They must
have noted that commercial radio has a 45% share of all radio listening (the
rest is the BBC), and that Sky News has a contract with Independent Radio News
(IRN – a body owned by the commercial companies collectively) to supply
material for radio bulletins. What they failed to notice was that the BBC
broadcasts far more news and current affairs (the categories Ofcom says have to
be measured in a plurality review) than the commercial stations. When Ofcom
tried to measure radio news consumption in 2010, it estimated the split between
the BBC and the commercial sector at 73:27. But that excluded – despite Ofcom’s
opinion that it should have been included – all current affairs content, where
the split is even more heavily in the BBC’s favour. Combining the two genres,
the ratio is 85:15.

But that’s
not the whole story. Sky News certainly provides material to the commercial
stations, but they nearly all simply use that as one resource amongst many in
their compilation of news bulletins. IRN was so bewildered by Ofcom’s report on
the NewsCorp bid for Sky, which had included bizarre and unfeasible estimates
for both the reach of commercial radio news, and the role played by Sky, that
they undertook detailed research. This revealed that the two-minute Sky News
package was sparsely used by radio stations: just 7% of their bulletins were
explicitly labelled as from Sky News.

7% of 15% is
1.05%: rather different from 45%. Given that the stations themselves have
editorial, contractual and legal responsibility for all the news they broadcast, it is hard to argue that Sky News controls even the 1%: its role is little
different from that of Reuters or Associated Press, neither of which has ever
been accused of controlling any part
of the UK’s media just because their output is used. Moreover, given the
obligation on all commercial radio stations to comply with the requirement for
due impartiality and accuracy in news output, it is hard to see what difference
it might make if Sky News did “control”
that 1%.

Amusingly,
the dynamic duo (Ed and Vince) fail to point out that NewsCorp already controls
2% of the radio audience (and thereby nearly 1% of radio news consumption)
through TalkSport, which it bought earlier this year. But as that transaction –
bringing TalkSport under the same umbrella as the newspapers – aroused no
opposition, petitions or political intervention, it is hard to see how an
additional 1% could make any difference.

Of course,
there is also Sky News as a TV service, which accounts for about 7% of TV news
consumption. Including its online audience, the Sky News TV service’s share of
all news consumption in the UK is about 3%. What difference would it make to UK
media plurality if Fox took 100% control of Sky?

*****************

In the 2010
assessment of the last proposed transaction, Ofcom looked at the combination of
Sky News with the newspaper interests of News UK (the UK print arm of
NewsCorp). It acknowledged that there would be no actual reduction in owners of
media enterprises from NewsCorp buying the 61% of Sky it did not already own:
there was no large holding within that percentage - just a mass of small
shareholders, mostly investment firms.

Ofcom
nonetheless imagined that full ownership of Sky might have some implications,
even though it was acknowledged that NewsCorp had always had operational
control of Sky, despite – since 1990 – only owning 39%. Ofcom claimed – wrongly
– that full ownership would allow NewsCorp to replace the editor of Sky News:
in point of fact, no editor of Sky News has ever been appointed without
NewsCorp’s agreement.

In the same
vein, even though NewsCorp had always had operational control of the NewsUK
newspapers and of Sky (and Sky News),
Ofcom somehow thought that increasing NewsCorp’s ownership of Sky would have
implications for media plurality, and accordingly went through a series of
calculations of what the combination of the newspapers and Sky News meant in
terms of control of UK news consumption (the nub of concerns about media
plurality).

Sadly for
Ofcom’s reputation as a regulator, most of these calculations were hopelessly
awry. That all the errors served to
enlarge the perceived dominance of NewsCorp and reduce that of the BBC only
called into question the impartiality of Ofcom itself (which had been led from
its inception by committed Labour Party supporters, and which in 2010 was in
the midst of a fierce and expensive legal battle with Sky over the wholesale
price of its sports channels).

The biggest
mistake was in calculating the significance of newspaper readership. National newspaper
sales have been reducing by about 2% a year for more than two decades, such
that barely 15% of the population now buys a national title every day; however,
the more important measure is of “readership” of these titles, which is
measured quarterly, and remains at around 25%.

Ofcom’s key
error was to treat every minute reading newspapers as equivalent to a minute
watching TV news. A moment’s reflection exposes the error: at least half of the
time spent reading newspapers has nothing to do with news, but consists of
horoscopes, travel information, reviews of films, horseracing tips, crosswords
and other puzzles, recipes, fashion guidance and TV listings – not to mention
advertisements. All this absorbs at least as much time as “news” and
“opinions”. The experts at Enders Analysis suggested to the Leveson Inquiry
that less than 20% of newspaper content constituted “news”.

Despite
acknowledging these other elements, and despite the example of the German
regulator in discounting newspaper “readership” accordingly in these types of
calculation, Ofcom insisted on its preferred approach. As a result, it grossly
exaggerated the role of News UK in news consumption.

At the same
time, it excluded from its assessment all the great regional newspapers like
the Yorkshire Post and The Scotsman, despite the millions of sales for morning,
evening and weekly editions, not to mention the millions of free newspapers,
like Metro and the Evening Standard, that are read daily. This omissionhad the side effect of artificially
enlarging News UK’s significance, in that – unlike its rivals, Trinity Mirror
and Daily Mail General Trust – it owns no regional titles.

The Ofcom
report on the 2010 transaction listed newspapers as representing 40.3% of all
news consumption, and TV as 33.9%. Once a discount of 50% is applied to
newspaper readership figures, and the decline in readership since 2010 is
factored in, we find that the correct figure for the national titles is 18.5%,
plus an estimated 4.4% derived from their share of online news consumption. Of
that, News UK accounts for just under a third, at 6.3%, rather than the 13.8%
reported by Ofcom. Correcting the newspaper figure has the effect of enlarging
the TV share of news consumption, to 39%.

***************

Ofcom’s
assessment of TV news also left much to be desired. Having announced that
current affairs needed to be included in the consumption calculation, it
ignored that genre. It then calculated the reach of the main TV news
programmes, using just one set of assumptions, without explaining that there
are dozens of ways of calculating reach: the length of continuous viewing being
measured can be 3 minutes, 5 minutes, or indeed any other number, just as the
period within which this continuous viewing is measured can be a day, week, a
month, or any other length of time. So, for instance, by using 5 minutes a week
as the test, rather than 3 minutes, the reported reach for Channel 5 News
dropped by 60% - because many of its news bulletins were shorter than 5
minutes.

This was not
unimportant, as Ofcom decided to attribute to Sky News the entire share of
viewing of news on Channel 5, in terms of both reach and volume. This was
multiply contentious: as a former Chief Executive of Channel 5, I knew
perfectly well that the legal and regulatory responsibility for its news output
rested with Channel 5 itself, not with its contracted supplier (be that Sky
News or ITN). Certainly, if Ofcom had had a problem with any output, it would have
ignored the supplier, and dealt solely with the licensed broadcaster. Subsequently
– if a little grudgingly – Ofcom has accepted the view of the Competition
Commission that, at the very least, editorial control is shared between
broadcaster and supplier.

But this was
not the only reason for criticising the Ofcom approach. Even at the time that
Ofcom was conducting its exercise, Channel 5 had announced that it was
replacing Sky News with ITN as its supplier: indeed, in their submission of
evidence to Ofcom, Enders Analysis expressly excluded Channel 5 from the Sky
total when it was working out the proportions of news consumption attributable
to Sky and to other broadcasters. That Channel 5 wanted to change the style and
tone (as well as cost) of its news output confirmed that it exercised at least
shared control of its output.

As it
happens, the mis-attribution of the Channel 5 news element only marginally
affected the Ofcom report, which claimed the Sky News share of all news
consumption to be 3.1%, out of a TV total share of 33.9%. As explained above,
that 33.9% is really 39%, and the Sky News share should have been stated as
2.3%. By comparison, the attribution to Sky News of all commercial radio news reach and consumption was a massive error
– although not as gross as the miscalculation by Miliband and Cable – all the
less understandable given Ofcom’s status as the regulator for commercial radio.

****************

It
transpired that Ofcom did not really know how much news its commercial radio
licensees broadcast, how they compiled their bulletins, nor what the true
extent of reliance on Sky News was, whether as a source or as a packager of
ready-made bulletins. Ofcom compounded these errors by offering a version of
radio news reach which was wholly implausible: recognising that the industry
did not measure the reach of genres, Ofcom chose to treat any level of radio consumption as equivalent to news consumption,
even though news constituted less than 5% of commercial radio output. This was
ridiculous – but even as, in mealy-mouthed fashion, Ofcom accepted that such an
assumption was “likely to overstate” commercial radio news reach, it failed to
abandon it.

Ofcom also
failed to include current affairs in its attempts to measure radio news
consumption. Given all these mistakes, it was no surprise that Ofcom’s
attribution of radio news consumption to the planned merged entity was
hopelessly wrong. Its report to the Secretary of State included a figure of
6.7% as commercial radio’s share of total news consumption, all attributable to
Sky News. The true figure was 4.2%, of which at most 0.2% could be attributed
to Sky News.

***************

The
combination of Ofcom’s mistakes led them to report that the combined share of
news consumption accounted for by Sky News and News UK was 23.7%, whereas the
correct figure was in the range of 9-10%. Conversely, the Ofcom figure for the
BBC was 43.5%, when the correct figure was over 60%.

The most
frustrating aspect of the Ofcom exercise was that the third measurement of
consumption it stated as relevant was based on its own regular research into
what consumers said was the relative importance of different news sources. As
the whole point of a media plurality review is to ensure that a single player
does not exercise undue influence, what people actually say about what
influences them is surely central.

Consistent
Ofcom research over the years – re-visited for the report on the transaction –
showed that television is overwhelmingly the most important source of news,
named by over 70% of respondents, with all other sources – radio, newspapers
and online – typically in single figures. By applying these weightings to the
shares of consumption within each of the four categories of television,
newspapers, radio and online, Ofcom would have concluded that the BBC’s score
was over 60%, and the combined score for News UK and Sky News was just 10%.
That this subjective approach so precisely reflected the proper assessment of
objective behaviour only emphasises how undisciplined – at best – the Ofcom
analysis was.

**************

Where does
that leave us this time round? The separation of the Murdoch entities on the
face of it eliminates the case for any regulatory intervention: there is no
question of any anti-competitive business combinations – and, anyway, the EU
competition authorities quickly dismissed fears expressed by the media alliance
with respect to such combinations last time round.

Fox will
nonetheless be forced to submit the bid to the EU again, especially since Sky’s
embrace of the German and Italian satellite TV businesses: but it is hard to
see how any kind of problem at that level will arise. More delicate is the
question of media plurality – and within ten days of Fox formally submitting
the transaction to Brussels next year, the UK Culture Secretary, Karen Bradley,
will have to decide whether to use her powers under the Enterprise Act.
Technically, these can only be exercised with the permission of the EU, but
Brussels acknowledges the special issue of media plurality. So the minister –
acting in a quasi-judicial capacity, without any discussion with cabinet
colleagues – has the right to ask Ofcom to investigate whether there might be
sufficient risk to plurality from the transaction to justify a reference to the
Competition and Markets Authority (the CMA, which has replaced the old
Competition Commission) for a full inquiry.

The test the
Act invites the minister to apply is normally whether a proposed transaction
will reduce the number of relevant media enterprises below the level to
safeguard media plurality, which itself is defined as (in the case of
newspapers) a plurality of views or (in the case of broadcasting, where
provision of “views” is expressly forbidden by statute) a plurality of owners.

The statute
does not define “sufficient”, and the definition of media enterprises excludes
ITN (which is not a broadcaster). Even the question of “control” is not
defined, though the Act includes a clause that recognizes “control” as potentially
being exercised even where a party has less than 50% ownership (which seems
directly to address the Murdoch factor, but which Ofcom chose to ignore in its
2010 report).

The problem
for the minister – and indeed for the opponents of the Fox bid – is how to
differentiate between a controlling ownership stake (which the Murdochs clearly
have both in Sky currently and in News UK) and something much closer to 100%
ownership. Would a media “owner” be removed by the transaction? Who, exactly?
And if there is no “reduction in the number of owners”, where does the issue of
plurality arise?

Interestingly,
when Northern and Shell bought Channel 5 in 2010 – very visibly displacing RTL
as an owner – there was no intervention. Nor was there an intervention when
NewsCorp bought TalkSport this year – quite clearly reducing the number of
owners of media enterprises, and enlarging the share of media controlled by the
second player in the media world (even if one far behind the BBC in terms of
news consumption).

The question
seems fairly binary: do the two separate controlling stakes (in Fox and
NewsCorp, and through them to Sky and News UK) already risk the UK’s media
plurality (in which case why did Ofcom not say so when it issued a special
report on media plurality three years ago)? If not, in what way would full
ownership by Fox of Sky do so? Last time round, in 2010, Ofcom imagined –
wrongly – that full ownership of Sky by NewsCorp would allow the Murdochs more
control over Sky News. Quite why that should cause concern, anyway, given the
obligation for Sky News to observe rules on due impartiality and accuracy, was
never satisfactorily explained: implicitly, Ofcom was admitting that it was
unable to enforce its own broadcasting code, and would be unable to remove the
Sky News licence if the code were repeatedly breached. This untenable
proposition was never put to the test at a full competition hearing, which is
probably just as well for Ofcom.

**************

Nonetheless,
it is quite likely that Karen Bradley will indeed intervene, on the basis that
an initial Ofcom inquiry would either clear the bid quite quickly, or find
enough issues to justify a full CMA process. The chances of the CMA blocking
the bid are low, and even a six-month investigation would not push Fox beyond
its self-imposed deadline of closing the deal by the end of 2017. On that
basis, Bradley might calculate, where is the harm?

Indeed, Fox
might even welcome an Ofcom process, as defusing the political opposition to
the bid. Paradoxically, the party with the most to lose is Ofcom itself, which
will have to decide whether or not to abandon most of its 2010 methodology, or
risk being overturned decisively by the CMA (which would no doubt spend some
time examining the inadequacies of the 2010 report).

The current
Sky share price – nearly £1 below the £10.75 offer price – suggests that the
market still perceives regulatory risk (there are reportedly shareholders who
think the offer price is too low, but if they were significant in number,
logically they should be pushing the price up, not down). We shall see.
Meanwhile, there will be plenty of noise around the issue. Will that include an
abject apology from Messrs Miliband and Cable for their ridiculous claims about
radio news? I am not holding my breath.

About the author

David Elstein is Chairman of openDemocracy's Board. He is also Chairman of the Broadcasting Policy Group.

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